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Interaction of Fiscal Policies on the Euro Area: How Much Pressure on the ECB?

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  • Luca Onorante

Abstract

Since the Helsinki European Council of December 1999, a process of increased coordination of fiscal policies in the area of the Euro seems to be on its way. In this paper I examine this process from the point of view of the independence of the European Central Bank (ECB). The interaction of the governments and the ECB is addressed in a game theoretical framework. First, the conditions under which the national governments are able to put pressure on the ECB are made explicit. Then the main question is addressed: would a greater fiscal coordination reduce or increase the capacity of the monetary authority of targeting long run inflation? Formal and informal, discretional (positive) and rule-based (negative) coordination and their interactions are examined as possible solutions of the game. I conclude that the main point is not how much fiscal coordination is there, but the form it takes. It turns out that a mix of informal political coordination and binding rules is the one that best preserves the independence of the ECB. For negative coordination, it is shown that a simple change in the definition of "excessive deficit" can at the same time allow more stabilization of output after a shock and a better control of inflation by the ECB.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2006/9.

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Date of creation: 2006
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Handle: RePEc:eui:euiwps:eco2006/9

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Keywords: European Montary Union; European Central Bank; game theory; fiscal policy; monetary policy; policy coordination;

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  1. van Aarle, Bas & Huart, Florence, 1999. "Monetary and fiscal unification in the EU: a stylized analysis," Journal of Economics and Business, Elsevier, vol. 51(1), pages 49-66, January.
  2. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1998. "Monetary union without fiscal coordination may discipline policymakers," Journal of International Economics, Elsevier, vol. 45(2), pages 239-258, August.
  3. Carmen Díaz-Roldán, 2000. "Coordination Of Fiscal Policies In A Monetary Union," Working Papers 00-09, Asociación Española de Economía y Finanzas Internacionales.
  4. Jose Emilio Boscá Mares & Vicente Orts Ríos, 1990. "La Coordinacion De Politicas Fiscales En El Marco De Una Union Economica Y Monetaria," Working Papers. Serie EC 1990-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
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Cited by:
  1. Acocella Nicola, 2013. "Teoria e pratica della politica economica: l'eredità del recente passato," Rivista di storia economica, Società editrice il Mulino, issue 2, pages 223-248.
  2. Nicola Acocella, . "The theoretical roots of EMU institutions and policies during the crisis," Working Papers 126/14, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.
  3. Nicola Acocella, . "A tale of two cities: exit policies in Washington and Frankfurt," Working Papers 117/13, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.

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